This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Junk-Bond Bargains Await the Brave

The past few weeks have been scary for almost every type of investment other than Treasury bonds. High-yield bonds, also known as junk bonds, have been hit especially hard: The average high-yield bond fund lost more than 15% during the 30 days through Oct. 9, according to Morningstar.

If you like looking for bargains among downtrodden investments, you might be considering increasing your stake in this high-octane segment of the bond market. Indeed, junk bonds now offer some of the lowest prices and highest yields they ever have, relative to Treasury bonds. Trouble is, junk bonds remain enormously risky.

First, some background. High-yield bonds are issued by companies with relatively weak finances. (Those with credit ratings of BB or lower, as rated by Standard & Poor's.) A shaky balance sheet increases the chances that a company will be unable to meet interest and principal payments on its bonds, and will be forced to default -- hence the securities' trashy nickname. As a result, financially weak borrowers have to offer high interest on their bonds to attract investors.

A small allocation to junk bonds can play a valuable role in a diversified portfolio. The securities' high interest payments can boost the income your portfolio throws off. What's more, high-yield bonds have the potential for strong returns: The average high-yield bond fund gained more than 24% in 2003, according to Morningstar.

But junk bonds carry risks that are commensurate with their potential rewards. Economic downturns increase the odds that weak companies will default on their debts, typically causing investors to sell off high-yield bonds rapidly, as they have in the past month. Selling pushes the bonds' prices down and drives their yields up.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $129.02 -0.26%
FB $80.16 0.70%
GOOG $572.50 -0.20%
TSLA $199.14 -0.21%
YHOO $43.64 2.40%

Markets

DOW 18,116.53 -86.84 -0.48%
S&P 500 2,099.45 -8.33 -0.40%
NASDAQ 4,971.1970 -8.7040 -0.17%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs